December normally makes me happy. I love shopping and I love eating so the idea that Christmas is just around the corner is enough to cancel out pretty much any amount of misery. But not this year.
For starters, with retail sales so weak, shopping just isn’t as much fun as it should be in December. Earlier this week I stopped in an Oasis store to have a quick look around and found that not only was I the only person in there but it they weren’t expecting anyone at all. The changing rooms were roped off and the staff were sitting around listening to a mournful manager explaining that sales were down 5% on the year before. I bought a dress just to try and cheer us all up.
Then there is the avalanche of bad news in the papers. Who could possibly feel even faintly optimistic about the future after they’ve finished reading the business pages at the moment (particularly if like me you read all the papers and hence end up reading the bad news 5 or 6 times over)?
The most depressing news is, of course, on pensions – it seems there is no way round it, we are going to have to work until we drop and pay millions more in tax for the privilege of doing so. But the bad news doesn’t end at pensions.
There is consumer confidence (at its lowest for 2.5 years), and concern about inflation and interest rates. Then there is unemployment to think about too: British Airways is said to be eyeing up the future of 15% of its 46,000 employees and we can surely expect to see layoffs from some of the retailers soon. How long can the likes of B&Q cope with profits falling 50% year on year without taking a good look at their staffing costs? It’s all very worrying.
But take a look at the business books being published at the moment and you’ll find that the things I worry about are small beer compared to what the real pessimists have on their minds.
Just out is a book from Bill Bonner, author of the completely terrifying Financial Reckoning Day, which topped America’s bestseller lists for weeks last year with its dire predictions of economic implosion. His new offering, Empire of Debt, sticks to doom and gloom line, telling the story of how all empires are eventually undone by the same “vain over-reaching”.
The American empire is a “commercial empire”, says Bonner, and these work only for as long as the empire’s homeland industries have a commercial advantage over the rest of the world. When that is no longer the case – as with Britain at the end of the 19th century – commercial empires tend to fall back on debt to finance themselves.
And that is exactly what is happening in the US right now. America is now spending more on its military than the rest of the world combined for example. Yet it hasn’t any money left. So “in order to bring liberty and democracy to the world,” it has to borrow from everyone else (selling its bonds to the Chinese for example).
Can it ever pay them back? Not in real money, says Bonner. The US no longer has a competitive advantage in anything, the Asians do. And that means that the current situation is unsustainable. One day the Asians will get fed up and stop lending to the Americans and the empire will come tumbling down.
Look out, says Bonner, for the dollar to collapse as a result and the US economy to follow.
But Bonner isn’t the biggest worrier in the market. Also just out is “Wake Up,” from Jim Mellon, chairman of Charlemagne Capital. Mellon comes across on first meeting as a calm and contented sort of a man. But a quick read of his book shows you he is nothing of the kind. Instead he’s a nervous sort of a man.
Mellon agrees that economic leadership is in the process of shifting from West to East (China is “on its way to becoming the world’s largest economy”) and points to similar financial imbalances to the kind that bother Bonner – the record levels of fiscal, trade and personal debt in the West.
But he sees the globe’s problems as running even deeper than Bonner does: thanks to the widening gap between the rich and poor across the world he expects to see further “disaffection, anti-Western sentiment and religious fundamentalism” leading to non stop rounds of terrorism and the end of peace.
Add it all up and “the unparalleled prosperity enjoyed by Western nations over the past 50 years is unsustainable,” says Mellon. Expect asset prices to fall dramatically and “world trade conditions to deteriorate significantly.”
Not all of these predictions are completely convincing (how often does the worst really happen?). But under the apocalyptic language much of it is fairly sensible commentary. Take the dollar. The deficit problem has been undermining the US currency for years but despite all expectations to the contrary it hasn’t collapsed yet. According to the optimists this means that it is less likely that it will, that all the worrying is for nothing.
But this is nonsense. It’s like saying that just because you haven’t died yet you probably won’t. But you will – as long as the preconditions for death are in place (i.e. you are alive) it’s inevitable.
It’s the same with the dollar. We can’t say when it will happen but we know that as long as the preconditions for a crisis exist (i.e. the US is running massive trade and budget deficits) a huge financial crisis will one day come to America.
So what do you do about it? The authors agree on this bit. Buy real assets – things that won’t lose their value as Western currencies do, in particular gold, silver and diamonds.
The good news is that whether the global economy implodes or not this is fine advice. All three have tight supply and demand situations so they should work for you either way: if there is no crisis they will probably turn out to be good investments, but if there is, they’ll turn out to be great ones.
First published in The Sunday Times 04/12/2005